Market is hot? Don’t let it mess with your numbers.
You may have noticed that the Atlanta market in general is hot right now. Prices are going up. The newspaper is telling people values are going up. CNN, Fox and others are reporting more new developments every week it seems. If you are a homeowner, this is the news you have been wanting to hear. ‘Sellers market!’ is being proclaimed by agents in recent months and to a reasonable degree, that is the case.
So where does this leave you as a wholesaler? I would argue it leaves us in one of a few positions:
- Ride the wave and pay more for properties and hopefully wholesale for higher LTV’s
- Learn more about creative financing
- If you want to wholesale, stick to your formulas that you know work based on today’s values
Which is the right answer? As a wholesaler, clearly number 3 and to some degree number 2 if you want to branch out from just wholesaling. Yet answer number 1 is the answer that seems to be taken by the majority of wholesale deals that cross my desk.
Why is this? Many times it is new investors that are simply getting caught up in the excitement of getting that ‘first deal’ in hopes of a quick check. Sometimes it is wholesalers with larger Buyers list who ‘hope’ someone will bite on their deal. Sometimes people ride, in my opinion, the rather slippery slope of speculation of future values. Sometimes, some people just need to keep pushing inventory just because they do ‘volume’.
Regardless of our thoughts on any of these strategies, the bottom line is the focus on numbers that make sense seems to be secondary to whatever ‘hype’ is floating around. This is not good a formula for you or for your Buyers.
For instance, let’s take a look at East Atlanta. Considered a high competition area, wholesale deals here are now being put out as ‘deals’ for triple if not quadruple where they were just nine months ago. This is pretty drastic. While values of renovated homes or new construction have indeed risen, it is nowhere near as much as the price of several deals. This is not the formula you are looking for!
Consider the rehabbers stock formula (and yes some of your Buyers will use 60 or 65% instead):
ARV * .70 minus repairs minus wholesale fee = your maximum offer
Example deal that crossed my desk that doesn’t work:
$369,000 * .7 = $258,300 – $70,000 – $10,000 = $178,300 maximum offer
On this deal above, the asking price was $220,000 to me as a Buyer. We estimated the actual rehab as $150,000-160,000. As you can see the numbers are off and by a significant amount. We will not get into the issue on estimating repairs as a wholesalers as that is for another day. What I want you to notice is the deal simply does not work without a massive amount of risk or by hoping you have contractors that work for nearly free and Home Depot is in the ‘donate to an investor’ business. And while I recognize many rehabbers have different numbers, in our market, Buyers don’t tend to be off by $80,000 from each other in renovations for this price point.
Here is another real deal with numbers that work:
$350,000 * .7 = $245,000 – $80,000 – $10,000 = $155,000 maximum offer
In this scenario which is a real deal I am looking to close right now, the wholesaler is into a property for $152,000 and is selling to me for $162,000. He will make 10k gross on this deal and I get the house.
This particular deal is a lot harder to come by these days in our market with prices rising but they are out there! You as a wholesaler must stick to your guns and not get caught up in the hype of ‘low inventory!’, ‘prices are rising!’, ‘you have to pay more to get anything!’ And while there may be some truth to these statements, the reality is the deals where the numbers make sense are still out there. You may have to dig harder to find them. Don’t pay more just because it ‘seems like you should’. This is a recipe for disaster in our market. Each market is different so if you are outside of Atlanta, adjust accordingly but stay conservative!
The above mentioned deal has been worked on for months before the Seller finally decided to part with it at a price that made sense for everyone involved. However it took lots of patience and follow up.
So what should you do to ensure you are getting deals that make sense for your Buyers?
- Market, Market and Market consistently
- Make sure you know what your Buyers want and the numbers/formulas they typically use
- Don’t overpay
- Use verifiable MLS comps that make sense for the deal within the last six months
- Don’t overpay
- Get the full scoop on the property to the best of your ability so when you present it, your Buyer quickly gets a ‘feel’ for it to make a quick decision
- Don’t overpay
You may have noticed a theme… No matter what you do, Do Not Overpay!
For example, if you are at 75% ARV and the ARV is only 80k, these are small margins considering the work that goes into a rehab. Even if it were at 70% or even 65%, the margin is still rather small. It may not be worth your Buyers time if the rehab is of any significant size. If the values are higher, the spreads are bigger but also remember the Buyer pool for your Buyers is smaller so the percentages to use still don’t change very much, if at all.
As this market continues being hot, stay diligent and stick to your numbers! You’ll be much happier as you will have success allowing you to rinse and repeat. It may take a little more work with the increased competition but if you are consistent, it will pay off.
Stick to the numbers, don’t overpay and success will meet you at the finish line of most every deal you get.